Schwab ETFs Could Be A Gamechanger

Charles Schwab, one of the country’s largest asset managers with more than $200 billion in assets under management, has made quite an entrance into the ETF arena. The San Francisco-based company announced the launch of its first eight exchange-traded funds, including four that will begin trading on Tuesday. Each of the exchange-traded products from Schwab will compete directly with ETFs already offered by the “big 3″ of the ETF industry – iShares, Vanguard, and State Street – including some of the largest and most liquid ETFs on the market.

Taking Low Costs One Basis Point Further

Market leaders iShares, Vanguard, and State Street have accumulated hundreds of billions of dollars in their “core” ETF products – funds that focus on asset classes that are a major component of nearly every investor’s portfolio (e.g., small, mid, and large cap domestic equities). So Schwab comes into the ETF arena facing a steep uphill climb. In order to compete against the more established ETF providers, Schwab is relying on two key strategies. First, the expense ratios on the new ETFs will be cheaper than all of the competitors, including even Vanguard. Schwab’s broad market and large cap U.S. ETFs will charge 0.08%, setting a record for the ETF industry. A number of funds currently charge 0.09%, including IVV, SPY, and VTI.

In an effort to reduce expenses even further, Schwab will offer commission free trading in its line of ETFs to both individual investors and independent investment advisor firms who use Schwab’s custodial services. This represents a first for the ETF industry, and could make Schwab’s line of funds popular among investors with a focus on minimizing trading expenses.

Costs Trending Downwards

The past few months have seen continued innovation from the ETF industry (the two new funds from IndexIQ are great examples), but a number of new funds have targeted traditional asset classes, using expenses as a point of competition. Gold (SGOL) and silver (SIVR) commodity funds from ETF Securities undercut the expenses on the market leading funds, and have quickly accumulated total assets of more than $350 million. Just last week, UBS launched the E-TRACS DJ-UBS Commodity Index Total Return ETN (DJCI), a product that offers nearly identical exposure to iPath’s DJP at two-thirds the price (50 basis points compared to 75 for DJCI).

ETFs have become so popular in part because of their low costs relative to actively managed mutual funds. But as the entrance of Schwab into the market shows, there’s room for even further cost reductions, a trend that will obviously benefit investors.

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